The Art and Science of Happiness

Attended a talk at SMU today entitled, The Art and Science of Happiness: Perspectives from Philosophy, Psychology and Neuroscience. It is a very interesting mix of different discipline approaching the seemingly simple issue of happiness.

Prof Mark Nowacki approached the notion of happiness as human flourishing. He suggested Virtues as a tool of happiness and that it is a special form of habit. As with all habits, virtue requires practice. If we practice virtue in a right environment, we would probably flourish and "be happy". His arguments was elegant, but quite chim for me to grasp. Haha. He was my Analytical Skill prof who tortured me in Year 1. 

The second speaker talks about some technique to intervene to make us happier. Prof Tov presented on research that suggests that exercise like think about gratitude, acts of kindness, and positive thinking may help us feel happier. He also touched on the concept of "flow " where one will feel energized, and that the task on hand will be enjoyable and rewarding. Jie chao, reminds me to borrow the book from you when my term ends.

Prof Farber presentation on some of the mechanics of the brain provided me with many new information. We were introduced to some neurotransmitter and its impact on how we feel.   

Serotonin is a neurotransmitter that modulates our level of aggression, mood, social behavior, sexuality, appetite, demand for sleep and a whole host of other factors. A level of serotonin that is too low has been linked to clinical depression. Prozac, the famous anti-depressant, targets the level of serotonin and helps reduce occurrence of depression in the patients.

The professor asks the audience that if this neurotransmitter seem to be ‘bad’ human, so why has it not been removed from the process of evolution? A suggestion he made was that Serotonin also acts as a regulator of your point of view of your social status. It was found that in patient that went through traumatic accident, the level of serotonin was low. 

Imagine you’re an alpha male ape living in an ape tribe. After an accident that caused you to lose an arm and a lower Serotonin level which will make you think less highly of yourself. If you still think that you are an alpha male, you could get clobbered by the rest of the tribe. So the neurotransmitter ‘helps’ us not over step our social status to ‘protect’ us. Interesting. Dan Humphrey from gossip girl must have out of sync level of serotonin that caused him to hook up with Serena…or maybe he’s just plain dumb, or is he trying to make use of Serena to climb the social ladder to be the alpha male in town???

Oh ya, don’t do drugs. Morphine for instance screws up your level of Opioid. You’ll have that ‘blissful’ happiness feeling when level of Opioid is high. But if you take drugs like morphine, your brain will be so screwed up to appreciated other from of stimulus. Many types of drugs fry up your brain. Ya. So stay away from drugs so we can still appreciate that fresh cup of coffee with kaya toast.

By the way, it seems that Chocolates helps stimulate the level of Serotonin and Dopamine. But over consuming it and our body will convert it into Melatonin, which in large dosage wrecks your sex drive. Not forgetting that it is highly fattening, 294 kcal per Mars bar and 106 kcal for 2 fingers of kit kat. 

Will knowing all these make us happy? I don't know. But at least we may be able to better explain why we are... 

Bipolar Disorder

Bipolar disorder is a psychiatric diagnosis that describes a category of mood disorders defined by the presence of one or more episodes of abnormally elevated mood clinically referred to as mania or, if milder, hypomania. Individuals who experience manic episodes also commonly experience depressive episodes or symptoms, or mixed episodes in which features of both mania and depression are present at the same time. These episodes are usually separated by periods of "normal" mood, but in some individuals, depression and mania may rapidly alternate, known as rapid cycling. Extreme manic episodes can sometimes lead to psychotic symptoms such as delusions and hallucinations.

Source: http://en.wikipedia.org/wiki/Bipolar_disorder

Is the market exhibiting signs of bipolar disorder? S&P 500 fell from 1300 in early sept to a low to 850 last friday and rose to a high of over 1010 over the short span of 3 trading session. 

Is it possible that the 500 largest companies in the US increase in value by over 18%?

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Jeremy Tang sent this super fun link. Experience the world of Wii yourself!

When Markets Collide

Reading a very interesting book called "When Markets Collide" written by PIMCO's co-CIO Mohamed El-Erian. I'm only about less than half way through it and i realize how naive i have been in interpreting news, events and data over the past 2 years. The author encourages us to adopt a flexible 'thinking model' and asked us to learn how to interpret noise in the market. Btw, the book is up against Snowball in the FT/Goldman Sachs Business Book of the year award.

In a world of cyclical change, the way to deal with noise is largely to fade it and treat it as temporary and reversible. However, the author suggests that the current instability in the market suggests a longer term secular change in the financial market. Inconsistencies in the bond and equity market last year (a inverse yield curve and a rising stock market) and developing states being the largest creditor to the industrial world suggests that the there could be large developing change in the economic landscape. 

I'm reading it i immediately realized that i have been FAR too willing to accept the idea that "this too shall pass" and too quick to dismiss the notion that "this time is different". When reality contradicts my previous belief, i got stuck in the world of poorly developed misconceptions instead of going all out to explore and learn new ideas. I shall not succumb to hubris at such a young age. I shall be fearless in learning new ideas and be ruthless in destroying cherished opinions. Principles towards investing stay (ie long term and value oriented), but my attitude must improve. 

The difficulty lies not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

John Maynard Keynes

We are the lucky bunch

Totally enjoyed Daniel's post on some of the perils of value investing. It is both insightful and thought provoking. Daniel made a good case against jumping into US equities and why us mortals not being Warren Buffett should not emulate his every move, Xin Hong's post on his blog as usual gives us much to learn from. 

I agree with Daniel to a very large extent. However, as a cock eyed optimist (or at least an optimist with lazy eye), i think that the decision to 'jump in' or not is totally dependent on the investor's time horizon and risk appetite. I have a 30 year time horizon and can stomach a fall of my portfolio of over 50%, thus i'm fully invested. And Daniel, reading Cramer and Buffett's dueling view, i think they could be both right depending on holding horizon.

Some reflection...

Should i have lighten up on stocks earlier last year? on hindsight, yes. 

But given what i know then, should i sell? maybe. 

Looking at what i know today, should i buy/sell/hold? I'm cautiously optimistic.

As on the thesis of diversification, i believe that the two extreme ends make sense. Extreme diversification in the form of globally diversified index fund is how i do it, and that's where the bulk of my assets are. On the other hand, my portfolio picks consists of less than 10 stocks, with the top 3 making up almost half of the active management base. I'm surprised that this portfolio has held up quite well over the past 2 years against major indices, despite committing stupid mistakes like CFC and LEH. The common thread that runs through the failed investments is that i would never want to own the WHOLE company. So it is also not right that i would want to hold a slice of the company. 

In this world which prolong recession is probable and tight credit market,  i would ask myself the following question after finding a GOOD COMPANY before buying what is seemingly cheap.

1. Does the company depends on the credit market to maintain its operation? 

This would rule out many financial institutions, developers and companies that rely on debt refinancing to maintain operating cashflow.

2. Does the manager have substantial stake in the company? 

Angelo Mozilo, the CEO of CFC was busy selling shares before the share price went down and down.

3. Does the company have enough cash on hand and HIGHLY liquid assets that is not encumbered (e.g. pledged as collateral)? should there be a need to raise cash to pay for whatever.

4. After all the above criteria has been satisfied, can the company survive if they do no business over the next year or so while maintaining the required cash expenses (wages, rental etc)?

5. Is equity the best form of security to hold?

Holding debt or quasi equity investment in a perfectly decent company may be more advantageous than than common equity.

6. Following qn 5, are there more senior securities in the company that any upside of the firm no long accrues to common equity holder?

We are really lucky to have this crises to learn from. Imagine that those bankers who are in their forties wouldn't have experienced the late 70s crazy inflation and early 80s S&L crises. Even the banking crises in late 80s was comparatively short lived. The relative prosperity of 90s sprinkled with the dot.com bust and LTCM debacle is nothing compared to the current crises.

PIMCO's Bill Gross Oct commentary is out. Fear the McFear! Go read it.

 

The Great Crash

Finished "The Great Crash (1929)" by John Kenneth Galbraith last night. It was an amazing read and it is both highly entertaining and insightful. Thanks Prof JJ for recommending it. Wow, the nature of Man's greed has not changed at all. The author gave a short summary of the characteristic of a speculative bubble;

"... But here is a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that send prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then for reasons that will endless be debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way."

The financial orgies that bankers and speculators engaged in came to an abrupt end early last year. But 2007 was the calm before the storm. Banks that have thrived on loose credit and rising home prices have suffered (to say the least) when home prices start to fall. As banks faced higher defaults, 'disciplined underwriting' came back to vogue suddenly and risky borrowers that have been been enjoying the high life by refinancing previous loans suddenly faced calls on loans with no available lenders. 

Home owners in some many american states could no longer use their houses as ATM and drawdown their home equity. Many faced negative home equity instead. Exotic financial instruments such as CDO, MBO, CDS exploded. The banks start to suspect each others balance sheet (due to the toxic mess in the assets) , inter-bank short term financing becomes expensive and for some banks, their oxygen source was cut off and left to wither in the dried out land.

Where do we go from here? This is exactly the moment where the strong gets stronger and weak gets wiped off. Examples of Wells Fargo's bid for Wachovia and Eli Lilly's purchase of ImClone is a good example of well capitalised firm taking advantage of the credit crises.  Others firms like and Leucadia and Berkshire are also finally moving their huge pile of cash to some other uses. Can we identify these strong companies and capitalise on their strength? Are they available at not too high a price? Seek and i hope i'll find some more. 

Anyway on the topic of the Great Crash, my terrible driving skill finally materialized as a physical damage to my dad's car. It happened in a rather spacious carpark. While reversing into a parking lot, the front side of the car brushed against the rear bump of a van (that is OPPOSITE the lot i was reversing into). Haiz. My dad's hand was cold when he calmly told me to change over and he parked the car in. He didn't even scold me, and even managed to say something like 'study hard hor, can't be a taxi uncle next time'. WOW! the papa that explodes to things like me/my mom being 5 mins late has EVOLVED.

Think i must really find ways to be pretty rich before too long. If i can't drive my parents around next time, must at least get a trustworthy chauffeur to ferry them around. 

For me? i think i'll just have a deal with SMRT to have my private cabin so i can do my part in keeping mobile accident rate and blood pressure of other road users low.

The impersonal claim

I really like Jie Chao's post on Darth Vader. So i shall shamelessly quote from his blog here, haha.

Joseph Campbell: Darth Vader has not developed his own humanity. He's a robot. He's a bureacrat, living not in terms of himself but in terms of an imposed system. This is the threat to our lives that we all face today. Is the system going to flatten you out and deny you humanity, or are you going to be able to make use of the system to the attainment of human purposes? How do you relate to the system so that you are not compulsively serving it? 

On how to not lose our humanity: By holding to your own ideals for yourself and, like Luke Skywalker, rejecting the system's impersonal claims upon you.

(see full post here)

Looking at myself and those around me, i guess most of us are shaped by the world around us. The expectations of our parents, friends, loved ones, those of the institution (think getting high GPA = good job) and 'social norm' influenced us to make many decision that we would otherwise not make. 

I applaud Xin Hong's reply to his friend's qn on why doesn't he apply to "prestigious institution". He said that wants to work for a firm which live the principles that he agrees with and work for a person (a prof who taught a course in SMU) whom he admires. 

How refreshing! when he asked me if it made sense, i told him it totally does. My only caveat is that he must not be envious of others (whom i believe mostly less exceptional then him) who will earn way more than him (at least in the beginning). 

To see Chin Ta dance in the library was quite stunning at first, but now there's a bunch of his Caderas friends who'll dance with him in that corner in the library. Not distracting cuz they count their dance steps to silent beats, but very entertaining. He has essentially re-shaped the 'imposed system' in his idiosyncratic way. Btw, HAPPY BIRTHDAY!!! 

End of Mid-term exam week today. 'Buang' my MS exam today. Probably got 40 odd marks out of 100. Now my grades depend on my relative 'buangness' of my classmates. Dunno how to do well in a class where they can talk about gradients and coefficients and make much sense out of it. They are having a private conversation in class with the prof which i'm not part of. 

Yippee! Mid Term Break. Time to read my Buffett biography and sit around and do nothing (at least for a few days).

Once again, the same quote from a previous post:

The vulgar thus through imitation err;

As oft the learned, by being singular; 

So much they scorn the crowd, that if the throng

By chance go right, they purposely go wrong.

~Alexander Pope

3 mil dollar trip to Phuket

It has been a week since US Treasury proposed the bail out plan (version 1) to save the financial system. A professor of mine described the plan as similar to a student going to a vacation to Phuket and asking 3 mil bucks as travel allowance. When asked about how he's going the spend it, the student answers "i don't quite know how i'm going to use it, but let me reassure you that i'll be responsible about spending it".

Almost all commentators agree that the current condition is a crises of confidence, so taxpayer's money should be used to restore confidence, such that the financial crises does not flow from "Wallstreet to Mainstreet". However, there are huge disagreement to what's the best plan. 

George Soro, Nouriel Roubini, and the guys at FPA commented that the is fraught with dangers, such as the issue of moral hazard, the rationale behind socializing losses but not gains, and whether this plan is going to stem systemic risk. Underpinning their arguments, is a common theme that the market economy should be allowed to work, un-disciplined lender's equity should be wiped out and new players should emerge. Some suggested that a model could be Buffett's infusion of highly dilutive capital into Goldman (great for him, but dilutive for existing shareholders), or allowing companies such as WalMart and others with un-levered balance sheet to be granted banking license. 

In 10 years time, we will look back to these days as the days where over-levered institutions engulf in flames for their greed. We'll vow to never make the same mistakes again. But we'll surely find new ways to burn, for humans have an enormous relish for folly.